Thursday, May 21, 2020 / by Ken Couture
Over the last few months, shares of cruise companies, airlines, hotels and casinos have plummeted as investors exit their positions for fear that it will take years for companies in the travel industry to recover, if they ever do. In fact, though he once said that you should be greedy when others are fearful, even Berkshire Hathaway (ticker: BRK/B, BRK/A) CEO Warren Buffett has exited all of his positions in airline companies. But there’s still value to be had from the travel industry if investors look closely. Keep in mind that these contrarian investments are not for the faint of heart, are largely predicated on health authorities getting the virus under control, and may take years to pan out. Yet if and when the travel industry eventually recovers, these are six of the best travel stocks to buy.
Cruise line stocks have regained some lost ground as investors realize that pent-up demand for leisure travel will lead to higher bookings in the future. In fact, when Carnival announced it would resume cruises starting in August, the company saw bookings skyrocket more than 200% from August 2019 rates. While Carnival has had to sell 72 million shares and take on nearly $6 billion in debt in an attempt to stay afloat, it had one of the best balance sheets in the industry heading into the crisis, and CEO Arnold Donald has noted that it has enough cash to survive through 2020 even if it doesn’t make any revenue. If it can convince customers that it’s safe to sail once again, Carnival is an investor’s best bet for a cruise industry recovery.
Delta Air Lines (DAL)
Much like its size somewhat insulates Carnival, Delta, as the largest airline in the world, entered the current crisis from a position of strength. Though the company’s balance sheet was weighed down by debt, its free cash flow, net income and high margins were the envy of the industry. Now Delta has had to halt its dividend, the U.S. government owns 1% of the company, and the company is spending more than $60 million in cash every day just to keep the lights on. CEO Ed Bastian has warned that Delta “will be a smaller airline for some time,” but for a company that already excelled at operational efficiency, that may not be a bad thing at the end of the day.
Southwest Airlines (LUV)
Southwest CEO Gary Kelly recently noted that the company “burned through almost a billion dollars in the month of April” as it contends with stay-at-home orders and a lack of business travel; on top of that, Southwest’s fleet has more of the notorious Boeing 737 MAX planes than any other major airline. Yet despite these alarming problems, Southwest’s fiscal responsibility is second to none, and the company’s low level of debt at a time when balance sheet strength may be the key to its survival should give investors some confidence. In addition, the airline has kept its focus largely on domestic flights in recent years, and considering the fears of contagion surrounding international flights, this may prove to be a distinct advantage going forward. LUV is certainly one of the best travel stocks to buy for an industrywide recovery.
Hilton Worldwide Holdings (HLT)
With most of the world locked in their own homes, hotel stocks have seen a dramatic decline in bookings since March. For Hilton, that meant revenue dropped nearly 13%, net income plummeted 88.6% and global occupancy levels hit a low of 13% during the first quarter. Though CEO Chris Nassetta stated that Hilton “expects a much more dramatic impact on our second-quarter results,” it’s important to note that the company’s balance sheet looks very secure. With the company drawing down the rest of its credit facility, the presale of Hilton Honors points and a bond offering, it now has $3.8 billion in cash. At the same time, there are rays of hope — worldwide occupancy is up to 23%, and almost all 150 of its Chinese locations have reopened.
Las Vegas Sands (LVS)
Casino giant Las Vegas Sands bet big on the Asian-Pacific market, with 85% of its 2019 revenue coming from operations in Macao and Singapore. To help fund the company’s expansion in Asia, Las Vegas Sands has taken on more than $12.3 billion in debt — a daunting number compared with the $6.5 billion it has in cash and available liquidity. Yet the timing of debt maturities works out nicely, with only $117 million due in the next two years. That gives Las Vegas Sands plenty of breathing room as it continues to expand operations in Macao and Marina Bay, with new properties coming online throughout 2020 despite the crisis. When the outbreak does eventually pass, Las Vegas Sands should be well-positioned to capitalize on the continued growth of Asian gaming markets.
MGM Resorts International (MGM)
If investors would rather place their bets on a speedy domestic recovery, they should look to MGM Resorts — last quarter most of the company’s revenue came from its U.S.-based businesses, while only 12% came from its Macao operations. That said, the situation hasn’t been good in either market, and in the first quarter MGM reported losses of 45 cents per share after adjustments for real estate sales. But those real estate sales couldn’t have been better timed, and between that, a recent debt issue and a revolving credit facility, the company has $7.1 billion in total liquidity. Management has made it clear that it doesn’t expect things to turn around this year, but MGM’s strong balance sheet means the company will survive and quite possibly thrive in the years to come.
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